EFFECT OF MERGERS AND ACQUISITIONS ON PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY 1998 – 2012
ABSTRACT
This study examined the effect of
mergers and acquisitions on the performance of Nigerian banking
industry. In order to strengthen the competitive and operational
capabilities of banks in Nigeria with a view towards returning global
and public confidence to the Nigerian banking sector and the economy in
general, the Central Bank of Nigeria instituted a banking reform in
2004, which saw most of the then existing 89 banks merging with each
other. The fundamental objectives of this research is to ascertain the
impact of mergers and acquisitions on the liquidity profile of
commercial banks in Nigeria, examine how mergers and acquisitions
adopted by commercial banks impacted on the return on equity of the
affected banks, evaluate the impact of mergers and acquisitions on the
debt/equity profile of commercial banks in Nigeria and examine the
extent to which earning per share of commercial banks improved as a
result of mergers and acquisitions. An ex post facto research design was
adopted in this study. The population of the study comprises of all 21
commercial banks in Nigeria. The study covered a period of 15years from
1998 to 2012. Secondary sources of data were used in this
study. The data were handpicked from the annual reports of the sampled
banks and internet. The data obtained were analyzed using panel data
analysis. The method of estimation used is the Ordinary Least Square
(OLS). The result of the study indicated that overall mergers and
acquisitions has a positive effect on the liquidity profile, return on
equity, debt/equity profile and earning per share of commercial banks.
The study recommends that the monetary authorities should establish an
institutional framework to sustain the positive and improved performance
of the banking industry in response to mergers and acquisitions.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
The Nigerian banking sector has undergone
remarkable changes over the years, in terms of the number of
institutions, ownership structure, as well as the depth of operations.
These changes have been influenced largely by challenges posed by
deregulation of the financial sector, globalization of operations,
technological innovations and adoption of supervisory and prudential
requirements that conform to international standards.
The Nigerian banking industry witnessed
dramatic transformation during the recapitalization exercise which
deadline was December 31st, 2005. Overall, the banking sector experience
steady consolidation through recapitalization and mergers and
acquisitions that have resulted in fewer banks holding a greater value
of the total assets in the sector (Okpanachi, 2011). Spearheaded by the
announcement of the Central Bank of Nigeria on July 6, 2004 about a
major reform program that would transform the banking landscape of the
country, an unprecedented process of merger and acquisition took place
in the Nigerian banking sector, shrinking the number of banks.
Immediately after the recapitalization
deadline ended on December 31st, 2005, the number of operating banks in
the country reduced from 89 banks to 25banks but later reduced further
to 23 with the merger of some banks like First Atlantic Bank Plc and
Inland Bank to form Fin Bank Plc. Stanbic Bank Plc and IBTC to form
Stanbic-IBTC Bank. The number of operating bank later increased to 24
banks with the entry of Citibank Nigeria Limited. The merger and
acquisition of the nine rescued banks i.e. the merger of Access Bank Plc
with Intercontinental Bank Plc: Merger of Ecobank Transnational
Incorporation with Oceanic Bank Plc: merger of First City Monumental
Bank with Fin Bank Plc further reduced the number of banks operating in
Nigeria to 21.
The wave of mergers and acquisitions that
had taken place in the Nigerian banking industry raises an important
question of whether bank consolidation enhances the financial
performance of Nigeria banks. Hosono et al (2007) argued that
consolidation may increase or decrease the performance of a bank.
Mergers and Acquisitions are common place in developing countries of the
world but are just becoming prominent in Nigeria especially in the
banking industry. Umoren (2007) says that merger and acquisition is
simply another way of saying survival of the fittest that is to say a
bigger, more efficient, better-capitalized, more skilled industry.
As the banks are devising ways of
improving efficiency and ensuring the optimization of the available
resources, policy makers and regulatory authorities are moving towards
openness, competiveness, and at the same time ensuring market
discipline. This is in tandem with the trend in the banking sector
globally. Ahmed (2000:33) described this development as a magic one
which caused quite a substantial number of Nigerian banks to be sick
while some became healthier. In his view, he contended that growth in
the banking sector should be transmitted easily into growth of the real
sector. But as banks continued to record impressive growth in all
economics, indices show a declining margin of economic growth. This
makes one wonder where the impacts of the impressive performance of the
banks as reported in the financial reports are being felt. Even the NDIC
(Nigerian Deposit Insurance Corporation) which is established to insure
the deposit liabilities of licensed banks has liquidated some
distressed banks. The action, Ezeikpe (1993: 36-38) commended while
arguing that some distressed banks should be liquidated as a way of
survival for the banking system. This study seeks to evaluate the effect
of mergers and acquisitions as strategic growth option in the Nigerian
banking sector, with a view to find out if mergers and acquisitions
result in superior financial performance, efficient, reliable and sound
capital base for the bank that fully embraced it.
1.2 Statement of the Problem
The outbreak of bank mergers in Nigeria
is attracting much attention, partly because of heightened interest in
what motivates firms to merger and how mergers affect efficiency.
However, there are often two distinct
views to the rationale behind merger and acquisition. The first held
view of mergers, especially those involving mega firms, is that firms
are merging just to get bigger and not to get more efficient.
Accompanying that notion is the fear that as merging firms grab greater
market share, individual freedoms, competition and efficiency are
threatened, because bigger is perceived as greater concentration of
power.
The second view holds that firm’s merger
not just to get bigger but also to be more efficient. It is claimed that
mergers enable the banking industry to take advantage of new
opportunities created by changes in the technological and regulatory
environment.
Fallout of this is the reduction in the
number of banks nationwide but the concentration of power in local
banking markets has not increased. And the very force of regulatory
change that spurred bank merger is also bringing new sources of
competition of local banking market (especially the management of the
country’s external reserves). The post-consolidation performance of all
Nigerian banks was overcast in 2009 by the global financial and economic
crisis, which was precipitated in August 2007 by the collapse of the
sub-prime lending market in the United States. Sanusi (2010) attributed
the post consolidation challenges of Nigerian banking industry to the
inability of the industry and the regulators to sustain and monitor the
sector’s explosive growth which as a result led to risk-build in the
system. This study shall investigate the effect of the merger and
acquisition that had taken place in the Nigerian banking sector on the
performance of the selected banks 1998-2012.
1.3 Objectives of the Study
In a broad framework, the general
objective of the study is to examine the effect of mergers and
acquisitions on the performance of the Nigerian banking sector
The specific objectives of this study were to:
- Ascertain the impact of mergers and acquisitions on the liquidity profile of commercial banks in Nigeria.
- Examine how mergers and acquisitions adopted by commercial banks impacted on the return on equity of the affected banks.
- Evaluate the impact of mergers and acquisitions on the debt/equity profile of commercial banks in Nigeria.
- Examine the extent to which earning per share of commercial banks improved as a result of mergers and acquisitions.
1.4 Research Questions
The following research questions are considered relevant for the purpose of this research work:
- What effect does mergers and acquisitions have on the liquidity profile of commercial banks in Nigeria?
- Do mergers and acquisitions have any effect on return on equity of commercial banks in Nigeria?
- What effect does mergers and acquisitions have on the debt equity profile of the commercial banks in Nigeria?
- To what extent have mergers and acquisitions adopted by banks impacted on the earning per share of the affected banks?
1.5 Research Hypotheses
For the purpose of this research, the
following hypothetical statements stated in their null forms are
considered relevant in order to guide the researcher properly:
H1: Mergers and acquisitions do not have any significant positive effect on the liquidity profile of the affected banks.
H2: Mergers and acquisitions have no significant positive effect on the return on equity of commercial banks.
H3: Mergers and acquisitions do not have
any significant positive effect on the debt equity profile of commercial
banks in Nigeria
H4: Mergers and acquisitions have no significant positive impact on the earning per share of the affected banks.
1.6 Scope of the Study
This research focus on the effect of
mergers and acquisitions on the performance of the Nigerian banking
industry.The time frame for the analysis is 1998 – 2012, a period of
fifteen (15) years. This is with the understanding that the time frame
will only be fair and balance for analyzing their performance. It is
also extended to 2012 to ensure that the information and data used are
timely, up to date and accurate enough to represent the current position
of the banks under study.
1.7 Significance of Study
The major significance of this study
relates to the evaluation of mergers and acquisitions in terms of its
impact on the performance in the post-consolidation era in the Nigerian
banking sector, this will serve as a yardstick for the justification of
the exercise. This study will also add to the general body of knowledge
on the subject matter of mergers and acquisitions and also compliment
the work of other authors.
In furtherance to the above, this research will also be significant to:
The policy makers and regulators of the banking industry,
it will present a schema, through its analysis that could assist them
in evolving policies and reforms that will positively impact on the
performance of the banking industry.
To the public, it will
enlighten the general public on the effect of bank consolidation on the
performance of banks in Nigeria, and also provide a better understanding
of the dynamics of the Nigerian banking industry and how it has
performed within the period under review.
To investors in general,
the study exposes the relationship existing between relevant variable
used in this study. Investors will be in a better position to make
rational investment decisions as the study will make them understand
better the nature of relationship existing between mergers and
acquisitions and various performance index of the Nigerian banking
industry.
To students, the
research will assist those who wish to take a career in economics,
banking and finance to advance their understanding of the concept and
mechanism of mergers and acquisitions and its effects.
Finally, the research work will serve as a reference material for future researchers on similar topic.
1.8 Operational Definition of Terms
Merger: In business or
economics a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve stock swap or
cash payment to the target. Stock swap is often used as it allows the
shareholders of the two companies to share the risks involved in the
deal.
Acquisition: This means
the buying of one company (the target) by another. An acquisition may be
friendly or hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is unwilling to be
bought or the targets board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger
one.
Bank Re-Capitalization: It
is the act of supplying long-term funds of the owners of the bank to
meet the requirement of monetary authority. Osiegbu (2005).
Consolidation: It is the
reduction in the number of banks and other deposit taking institution
with a simultaneous increase in the size and concentration of the
consolidation entities in the sector (BIS, 2001:2)
Shareholder’s fund: are
alternative terms for owners’ or shareholders equity. It represents the
funds invested in the company through stock purchase or other private
investments.
Economy: The
relationship between production, trade and the supply of money in a
particular country or region. It is the system of trade and industry by
which the wealth of a country is made and used.
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